In fact, President Trump expanded the economic battle to other countries this week, by slapping new tariffs on Argentina, Brazil, and France.

This week, Trump said he plans to impose new tariffs on industrial aluminum and steel from Argentina and Brazil. He said he’d also ramp up tariffs on a variety of popular French imports to the U.S.

By increasing tariffs on imported goods such as steel, the president hopes to make good on his 2016 promise to invigorate American companies, according to Fortune. However, steel companies are struggling, with U.S. Steel reporting a third-quarter loss of $35 million.

The trade war goes global

President Trump announced by tweet on December 2, 2019, that the United States would impose a 25% tariff on steel and a 10% tariff on aluminum from Argentina and Brazil as well as a 100% tariff on $2.4 billion worth of French foods and products.

Argentina and Brazil had previously been excluded from steel and aluminum tariffs in 2018 when the U.S.  reportedly imported $2.6 billion of steel from Brazil and $700 million of steel from Argentina.

President Trump alleged in the Twitter thread that both countries manipulate their currencies, hurting the American economy. Experts have disputed this allegation, claiming that Argentina and Brazil are actually trying to strengthen their currencies against the dollar. Instead, the president could be taxing Argentina and Brazil because they’ve sold billions of dollars worth of soybeans to China, which has halved its soybean purchases from the U.S. according to Bloomberg.

France has also been caught up in the trade war. In July, 2019, France passed a law placing a 3% tax called the Digital Services Tax on big American tech companies that operate in France such as Facebook, Amazon, and Google.

Responding to this tech tariff at the NATO summit this week, the Trump administration suggested that it would tax $2.4 billion worth of French goods at 100%, which could double the price of French favorites like wine, cheese, and cookware in the U.S.

The French Economy Minister Bruno Le Maire alleged that this 100% tariff would elicit a strong response from the entire European Union. The European Union on the whole recently became subject to American tariffs on $7.5 billion worth of European products.

South Korea too

In January, 2018, the Trump administration imposed a 50% tariff on washing machines from South Korea and a 30% tariff on solar panels from China. The move followed a push by domestic manufacturers of both products to get U.S. trade officials to impose taxes on imports, as a way to protect them from international competitors.  

The trade war’s impact on the U.S. economy

The trade war is reportedly costing American consumers. With the current tariffs in place, American households will spend an extra $2,031 per year, according to the National Foundation for American Policy.

Additionally, though Trump’s steel tariffs initially boosted the industry in 2018 with the creation of jobs and an increase in steel prices, the manufacturing sector remained slow for the fourth consecutive quarter as of December 2019.

Farmers say they are struggling because of the trade war as well. Countries such as China are raising tariffs on American agricultural products in response to the United States’ increased tariffs on Chinese goods, which some agricultural experts say may cost American farmers.  For example, China bought 5.9 million tons of soybeans from the United States during the first half of 2019, less than half of the 13.4 million tons that China purchased in the first half of 2018.

Background on the Trade War

• A trade war is when countries start waging an economic battle with each other using tariffs. One country will put tariffs on another’s goods, and the other will retaliate in kind.
• Over the last 30 years, the U.S. has signed numerous trade treaties to avoid trade wars, including the North American Free Trade Agreement (NAFTA).
• Agreements like this reduced the threat of trade wars, in part by eliminating many tariffs on exported and imported products.
• The Trump administration has been able to raise tariffs because of Section 301 of the Trade Act of 1974. Section 301 states that the United States can raise tariffs on countries that violate trade agreements or demonstrate unfair trade practices.
• Since 2018, the United States and China have notably been taking turns raising tariffs on each other’s exports. In May 2019, the United States doubled tariffs on $250 billion of Chinese products and China responded by announcing tariffs on $60 billion of American products. Steel, soybeans, whiskey, lumber, and other products have been caught in the crossfire of the trade war.

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That’s a leading reason why this week, after President Trump announced new tariffs on steel and aluminum, major indexes fell in reaction to the news.

The Dow Jones Industrial Average dropped 420 points on Thursday, and was down more than 300 points in late morning trading Friday. Similarly, the S&P 500 and the tech-heavy Nasdaq each fell more than 1% on Thursday, and both indexes continued their slide on Friday in morning trading.

Fears of an extended trade war–where other countries could retaliate by slapping tariffs of their own on U.S.-made steel and aluminum, rattled investors and the larger markets.

So what are tariffs and trade wars, and how do they relate to the stock market?

Let’s break it down.

What’s a tariff?

Trump has proposed putting a tariff of 25% on foreign steel, and one of 10% on aluminum imports, according to reports.

A tariff, sometimes called a duty,  is a tax typically imposed by one nation on another’s imports. (In some cases, tariffs can be levied on exports.) The tariff is generally calculated as percentage of the import’s total value, including freight and insurance charges.

In principle, governments impose tariffs to make their own products more competitive and affordable, and to generate revenues.

A trade war is when countries engage in a tit for tat over tariffs.

Think of it this way: The additional taxes imposed will make it more expensive for U.S. companies to buy foreign steel, so they may instead turn to steel made by U.S.-based manufacturers.  And if they do buy the more expensive foreign product, the tariff adds to U.S. coffers.

What’s a trade war?

A trade war is when countries engage in a tit-for-tat over tariffs. In response to U.S. tariffs on foreign steel and aluminum, countries such as China, the largest steel producer in the world, could impose tariffs of their own on U.S. steel, as well as our other exports.

That could reduce demand for U.S. exports, which could dent our economy.

In fact, leaders from various countries and trading blocs have already weighed in, suggesting they might do just that.

“The United States must know that if these unilateral decisions were to be maintained and confirmed, they would lead to a strong, coordinated and united answer from the European Union,” Bruno Le Maire, France’s minister of finance, told USA Today.

Chinese leaders have reportedly said they’d do what they need to protect their own markets, and have hinted they might retaliate further by putting tariffs on other U.S. products, such as our exports of soybeans, which totaled about $12.4 billion in 2017, according to reports.

Yet other countries from Canada to Mexico have also voiced concerns.

“Should restrictions be imposed on Canadian steel and aluminum products, Canada will take responsive measures to defend its trade interests and workers,” Foreign Minister Chrystia Freeland told Reuters in a statement.

Canada is the largest supplier of aluminum and steel to the U.S., and also purchases more than half of its steel from the U.S.

Steel and aluminum are in everything

Soda and beer cans, electrical components for smartphones, automobiles, building construction materials, and paper clips–you can’t go far without encountering aluminum and steel. Both materials are in most everything we use every day.

And executives from some of the leading business councils in the U.S. weighed in about the potential impact of the new tariffs, with some expressing fears that the duties will increase the costs of manufacturing.

“President Trump shouldn’’t undercut his own goal of helping U.S. manufacturers “win” again by imposing counterproductive tariffs on steel imports,” The Association of Equipment Manufacturers said in a statement.

Similarly, Molly Day, vice president of the National Small Business Association, told CNBC:

“This kind of tariff, while seemingly targeted, could have widespread implications and likely will result in increased prices of many goods,” said Day.

Why did the stock market fall?

Perhaps the most potent force in the stock market in recent weeks has been the fear of inflation. Signs of inflation caused major indexes to experience corrections in February, resulting in losses of at least 10%.

And the tariffs could potentially increase costs for U.S. businesses, according to reports, which could cause an uptick in inflation, as businesses raise prices to cope. When inflation rises, the Federal Reserve, the nation’s central bank responsible for setting monetary policy, usually responds by increasing interest rates to combat it.

Higher interest rates, in turn, can make it more expensive for businesses to operate, which can put further pressure on stock prices.

More background

Trump ran on an “America First” platform, which aims to advance the interests of U.S. manufacturers, in part by withdrawing from trade treaties.

Over the last 20 years, the U.S. has entered into numerous trade treaties, the most famous of which is perhaps the North American Free Trade Agreement (NAFTA). These treaties, which are complex multilateral agreements that favor negotiations between all countries that sign, have reduced the threat of trade wars by eliminating many tariffs on exported and imported products.

Trump has argued such agreements have flooded the U.S. with cheaper foreign-made goods, which make it difficult for U.S. manufacturers to compete.

And this isn’t the first time the Trump administration has moved to impose tariffs. In January, it approved steep tariffs on imported solar panels and washing machines.

The move followed a push by domestic manufacturers of both products to get U.S. trade officials to impose taxes on imports, as a way to protect them from international competitors.

China is the largest manufacturer of solar components in the world, and its prices are generally far cheaper than those for American products. American manufacturers of solar products have said a flood of imports from China has hampered their ability to manufacture.

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